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Are you actually getting the personal liability protection from your LLC or Corporation?

Unless you are making all other parties actually aware of your business entity, you may not be. A recent Wisconsin Appellate decision Black v. Bach, 2005AP3010 reminds us that agents (this means anyone, employees, owners, or anyone acting to bind the LLC or Corporation) need to take steps to ensure that everyone they deal with know the specifics of the entity and its liability protection, or that protection may vanish when it matters most.

It is up to the agent to make a full disclosure as to the nature of the entity that he or she is representing when entering into an agreement. The court states:

A principal is considered [only] partially disclosed where, at the time of contracting, the other party has notice that the agent is acting for a principal but has no notice of the principal’s
corporate or other business organization identity.

The court went on to say:

The general rule that agents are contractually liable where the principle is partially disclosed has produced the rule that an agent is liable where the contracting party is not aware of the corporate status of the principal. (emphasis added)

Finally, the court points out that the agent who seeks to escape liability has the burden of proving that the principal’s corporate status was disclosed. The court goes on to explain the contracting party has no duty whatsoever to inquire as to the status of the principal’s Corporation.

This means that the onus is on the agent, entering into any deal, to make it clear to all parties involved that they are representing a Corporation or LLC, what type of business entity it is, and the true identity of the business prior to the execution of the contract documents.

As frightening as this all sounds, that you may be personally liable in suits against your business, realize that with a little due diligence, these situations can be avoided. It starts with making sure that all contracts are in writing. We can once again go back to the article “Anatomy of a Contract” to point out how the Corporate structure should be made perfectly clear in the “Information” section of the contract. Other things can be done as well, ensure all business cards include “LLC” or “Inc.” on them, include the same on trucks, fliers, coupons, and whatever you use to advertise your business, and you will help ensure that you are not left vulnerable when you thought you were protected.

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